Simplified Regime vs Organized Accounting

Simplified Regime vs Organized Accounting

A Sole Proprietorship or self-employed person can choose one of two tax regimes which are simplified or organized accounting. Both the simplified regime and organized accounting are income taxation options that have specific requirements and advantages and disadvantages in their use. So, which one to choose? To help with the choice, we will analyze the characteristics of each regime.

 

Simplified Regime

The simplified taxation regime is the most common option which is assigned by default by the Tax and Customs Authority when an individual entrepreneur or self-employed professional opens an activity. This is characterized by the taxation of income earned by the application of coefficients, not considering the expenses of the activity. To be covered by this regime, you must accumulate the following requirements.

 

Be a taxable person resident in Portugal

Not being legally obligated to statutory audit

Have an annual gross income of lesser than 200 thousand euros

Have a balance sheet of the previous tax period of lesser than 500 thousand euros

The fact of having fewer tax obligations and extra expenses - such as not having to hire an official accountant - is one of the main advantages of this regime. The major disadvantage is related to the fact that it is not possible to deduct expenses as the Tax Authority considers that 75% of the income obtained is net and that the remaining 25% corresponds to expenses.

 

Organized Accounting

Organized accounting is the most efficient tax regime for more complex activities and when expenses with the activity exceed 25% of income. This tax regime is mandatory in the following situations:

 

All types of companies such as public limited companies or limited liability companies

All self-employed professionals or individual entrepreneurs who have a net annual income of more than 200 thousand euros

In the organized accounting system, you can deduct a large part of the professional expenses (for example, fuel, accommodation, computer equipment, among others) and accurately calculate the net income. The major disadvantages are legal obligations (such as preparing annual tax files) and hiring a certified accountant (an extra expense that can cost between €150 and €200).

 

Differences between Simplified Regime and Organized Accounting

You will have to analyze which regime best adapts to the income and characteristics of your business, taking into account that the greater the activity carried out, the more it fits into the organized accounting regime.

 

 

Note: self-employed professionals or individual entrepreneurs can opt for organized accounting even if their income does not exceed 200 thousand euros per year.

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(Author)

Raj Don